Carpe Diem

Robert Lucas in Today’s WSJ on Inflation Targeting

Nobel economist Robert Lucas writing in today’s WSJ (subscription required) in support of inflation targeting:

In the past 50 years, there have been two macroeconomic policy changes in the United States that have really mattered. One of these was the supply-side reduction in marginal tax rates, initiated after Ronald Reagan was elected president in 1980 and continued and extended during the current administration. The other was the advent of “inflation targeting,” which is the term I prefer for a monetary policy focused on inflation-control to the exclusion of other objectives. As a result of these changes, steady GDP growth, low unemployment rates and low inflation rates — once thought to be an impossible combination — have been a reality in the U.S. for more than 20 years.

I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

To me, inflation targeting at its best is an application of Milton Friedman’s maxim that “inflation is always and everywhere a monetary phenomenon,” and its corollary that monetary policy should concentrate on the one thing it can do well — control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.

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Canadian Health Care: No Waiting for Dogs and Cats

Not all Canadian health care is long lines and lack of innovation. We found one place where providers offer easy access to cutting-edge life-saving technology, such as CT scans. And patients rarely wait.

But they have to bark or meow to get access to this technology. Vet clinics say they can get a dog or a cat in the next day. People have to wait a month.

~John Stossel’s latest column “Socialized Medicine Is Broken and Can’t Be Fixed” (Note: The overall Canadian median waiting time for CT scans is 4.3 weeks in the traditional 12 specialties and and 4.5 weeks for psychiatry, see Fraser Institute.)

Meanwhile, waiting times for “free” health care in Canada for humans keep getting longer, according to The Fraser Institute (see chart below, click to enlarge). Note that the median wait time for a specialist in Canada increasd by 138%, from 3.7 weeks to 8.8 weeks, in just the 13-year period between 1993 and 2006.

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Ethanol Recipe: Midwest Corn + D.C. Pork + Taxes

“Washington might have a love affair with ethanol for political reasons, but increasing ethanol production will only lead to higher taxes, higher prices for both food and fuel, and damage to the environment, making us all worse off in the process. Congress needs to say no to the ethanol hustlers and end its political addiction to corn.”

From my editorial in today’s Sacramento Bee, “Ethanol: Midwest Corn, D.C. Pork,” also appeared in the Fresno Bee, the Saint Paul Pioneer Press, and the Charlotte News and Observer.

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FTC: Market Forces Led to Rising Gas Prices

As directed by lawmakers, who accuse oil companies of manipulation and overcharging almost every time gas prices rise, the Federal Trade Commission once again investigated price increases for gas and oil, this time for the increases during the spring and summer of 2006 (see chart above, click to enlarge). The FTC’s report was realeased a few weeks ago, and here is what it concluded:

The fact that the price increases were a worldwide phenomenon, coupled with evidence that U.S. refiners increased output once their refineries were repaired and back online, tends to support our conclusion that the 2006 price increases were caused by a confluence of factors reflecting the normal operation of the market, and also tends to explain why we did not find evidence that those price increases were caused by activities that violate the antitrust laws.

The FTC concluded that gas prices rose in 2006 for 6 factors relating to Supply and 1 factor relating to Demand:

Supply Factors:
1. Seasonal effects of the summer driving season.
2. Increases in the world price of crude oil.
3. Increases in the price of ethanol.
4. Declines in the production of gasoline, due to refiners’ transition to ethanol.
5. Persistent refinery damage related to 2005 hurricane damage.
6. Refinery outages caused by unexpected events and required maintenance.

Demand Factor:
7. Increased Demand

In other words, the FTC concluded that market forces of decreased supply coupled with an increase in demand caused gas prices to increase in the spring/summer of 2006. As one
commentator said:

“Once again the bogeyman turns out to be nothing more sinister than the law of supply and demand. Sure enough, when supply dwindles and demand goes up, so do prices. Big surprise. But every time gas prices go up, a certain kind of politician is shocked, shocked! And demands an investigation. Which is a lot easier than taking Economics 101 all over again.”

I think he’s implying that politicians have already taken Economics 101, but I’m not so sure about that.
Also, notice that two factors for rising gas prices are directly related to ethanol, which Congress mandates and subsidizes!
Carpe Diem

Shame on UC Davis and Reporter Sharon Stello

Greg Mankiw reports about how a group of UC Davis women faculty circulated a petition and pressured UC regents into rescinding an invitation to Larry Summers, the controversial former president of Harvard University, to speak at a recent board dinner in Sacramento.

Mankiw links to this article, which unfortunately grossly misquotes what Summers actually said. Here is what appears in the newspaper article:

In January 2005, Summers made controversial comments at the National Bureau of Economics Research Conference on Diversifying the Science and Engineering Workforce. There, he attributed the under-representation of women in science, math and engineering to, among other things, the “relatively clear evidence” that men and women differ in “overall IQ, mathematical ability (and) scientific ability.”

Here is a link to the transcript of what Summers actually said:

It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability-there is relatively clear evidence that whatever the difference in means-which can be debated-there is a difference in the standard deviation, and variability of a male and a female population.

As the graph above illustrates, the average (mean) intelligence of males and females could be exactly equal, but the variability (standard deviation or variance) of male intelligence could be greater than the variability of female intelligence. Result: There are more males 3-4 standard deviations above the mean, and more males 3-4 standard deviations below the mean, which would mean that there are more male super-geniuses than females, and more male super-idiots than females. MIT math and science professors are typically 3-4 standard deviations above the mean, and males could be overrepresented in those groups because they are overrepresented in the top tail of the intelligence distribution (and the bottom tail).

Mankiw says that UC-Davis should be ashamed of itself, I say that the Davis Enterprise reporter Sharon Stello should be ashamed of herself for journalistic malpractice, for grossly misquoting and misrepresenting what Larry Summers actually said. Notice that she took two different parts of a long sentence, reversed them, left most of the sentence out, put those two parts together and made a completely new sentence, and in the process completely changed the meaning of what Summers actually said at the conference.
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Greenspan’s First Interview Tonight on 60 Minutes

(CBS) – Former Federal Reserve Chairman Alan Greenspan admits he “didn’t really get it” that the subprime lending trend was significant enough to hurt the economy until very late 2005, but still defends his lowering of interest rates from 2001 until 2004 that critics say caused the crisis in the first place.

Greenspan, who led the U.S. Federal Reserve Bank through 18 years and 4 presidents, speaks to 60 Minutes correspondent Lesley Stahl in his first major interview tonight (Sunday), at 7 p.m. EST.

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Outsourcing/”Nearshoring” Updates

1. Caribbean Call Centers Booming: “In a global search for low-cost customer service, AOL considered call centers in India and other hotspots – then settled on the tiny island of St. Lucia.

In choosing the Caribbean island, AOL – a unit of Time Warner Inc. – joined other U.S. companies that have made the region a new global hub for call centers.

Plunging communication costs, workers who relate easily to American customers and the region’s famed hospitality are attracting American corporations, boosting the work force in the “nearshore” service industry in the Caribbean.

Note: Typical wage in Jamaica, one of the leaders of Caribbean “nearshoring,” with about 14,000 employees in the sector: $2.75 to $3.20 an hour.

2. Outsourcing Britain’s elderly to India: “First jobs were outsourced from Britain to India. Next it was healthcare, with hundreds of Britons travelling to leading hospitals in Indian cities for surgical operations and other medical procedures. Now another aspect of healthcare may be outsourced to India — that of looking after some of Britain’s elderly or disabled.
The reason is the same — costs are much lower in India.”

(Thanks to Sanil Kori)

Carpe Diem

Wages and Rupee Rising in India, Prices Up in China

1. NEW DELHI - Rising salaries for Indian software professionals will add to margin pressures at technology outsourcing companies in India, according to a survey released on Tuesday that showed wages rose an average of 18.7% this year.

The average annual salary for a software worker in India has risen to Rs620,000 ($15,500). The rise is slightly above the 18.3% salary increases recorded last year.

While salaries are still low compared with those of developed countries, margins at India’s information technology companies are also being squeezed by the appreciation of the rupee against the dollar. India’s biggest IT outsourcing firms generate most of their revenue from software exports to the US.

2. BEIJING – CONSUMERS in China’s cities have had it good for an unusually long time. During most of the past few years of double-digit economic growth, inflation—at least according to official figures—has been barely detectable. But data published this week show the biggest monthly rise in consumer prices for over ten years.

The latest figures were higher than many had expected. The National Bureau of Statistics said that consumer prices rose 6.5% in August compared with a year earlier, up from 5.6% in July.